<PAGE>   1
================================================================================

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                              Washington D.C 20549

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the quarterly period ended June 30, 1999 OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

Commission File Number 333-43549

                        EXTENDICARE HEALTH SERVICES, INC.

             (Exact Name of Registrant as Specified in its Charter)

<TABLE>

<S>                                                      <C>                           <C>
                   DELAWARE                              8051                          98-0066268
      (State or other Jurisdiction of         (Primary Standard Industrial           (I.R.S. Employer
       Incorporation or Organization)          Classification Code Number)        Identification Number)
</TABLE>

                            111 WEST MICHIGAN STREET
                            MILWAUKEE, WI 53203-2903
              (Address of Principal Executive Offices and Zip Code)

                                 (414) 908-8000
              (Registrant's telephone number, including area code)
                       SEE TABLE OF ADDITIONAL REGISTRANTS

--------------------------------------------------------------------------------


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes  X     No
    ---       ---

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<PAGE>   2

                        EXTENDICARE HEALTH SERVICES, INC.
                                      INDEX

  PART I.                  FINANCIAL INFORMATION                           PAGE
  -------                  ---------------------                           ----

Item 1    Condensed Financial Statements

          Consolidated Statements of Operations for the three months and
          six months ended June 30, 1999 and 1998                           3

          Consolidated Balance Sheets June 30, 1999 and December 31, 1998   4

          Consolidated Statements of Cash Flows for the six months ended
          June 30, 1999 and 1998                                            5

          Notes to Condensed Consolidated Financial Statements              6


Item 2    Management's Discussion and Analysis                              8


Item 3    Quantitative and Qualitative Disclosures about Market Risk       16



PART II.  OTHER INFORMATION
Item 1    Legal Proceedings                                                19


Item 2    Change in Securities                                             19


Item 3    Defaults Upon Senior Securities                                  19


Item 4    Submission of Matters to a Vote of Security Holders              19


Item 5    Other Information                                                19


Item 6    Exhibits and Reports on Form 8-K                                 19


SIGNATURES                                                                 20





                                       2
<PAGE>   3



                                     PART I
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                        EXTENDICARE HEALTH SERVICES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
            FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
                             (Dollars in Thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                    THREE MONTHS     THREE MONTHS        SIX MONTHS      SIX MONTHS
                                                        ENDED            ENDED              ENDED           ENDED
                                                    JUNE 30, 1999    JUNE 30, 1998      JUNE 30, 1999   JUNE 30, 1998
                                                    -------------   --------------      -------------   -------------
<S>                                                 <C>              <C>                <C>              <C>
   REVENUES:
     Nursing and assisted living centers            $ 234,164        $ 244,415          $ 462,010        $ 492,317
     Medical supplies and outpatient therapy           12,971           44,862             24,386           87,432
     Other                                              1,996            1,857              4,276            3,757
                                                    ---------        ---------          ---------        ---------
                                                      249,131          291,134            490,672          583,506

   COSTS AND EXPENSES:
     Operating                                        212,894          240,762            424,048          485,009
     General and administrative                        11,346           11,322             20,869           23,498
     Lease costs                                        5,155            3,726              9,800            7,432
     Depreciation and amortization                     12,769           13,844             25,476           27,458
     Interest expense                                  12,625           15,722             25,007           31,054
     Interest income                                     (464)            (248)              (818)            (951)
     Gain on sale of assets and other unusual items      (276)               0               (276)               0
                                                    ---------        ---------          ---------        ---------
                                                      254,049                0            504,106                0
                                                    ---------        ---------          ---------        ---------

     (Loss) earnings before provision for income
       taxes                                           (4,918)           6,006            (13,434)          10,006

   PROVISION (BENEFIT) FOR INCOME TAXES                (1,656)           3,375             (4,364)           5,255
                                                    ---------        ---------          ---------        ---------

     (Loss) earnings before minority interests         (3,262)           2,631             (9,070)           4,751

   MINORITY INTERESTS                                       6             (330)                21             (543)
                                                    ---------        ---------          ---------        ---------
     Net (loss) earnings                            $  (3,256)       $   2,301          $  (9,049)       $   4,208
                                                    =========        =========          =========        =========
   PER COMMON SHARE:
    Net (loss) earnings per common share            $      (3)       $       2          $     (10)       $       4
                                                    =========        =========          ==========       =========
</TABLE>

    The accompanying notes are an integral part of these condensed consolidated
    financial statements.




                                       3

<PAGE>   4




                        EXTENDICARE HEALTH SERVICES, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       JUNE 30, 1999 AND DECEMBER 31, 1998
                             (Dollars in Thousands)

<TABLE>
<CAPTION>

                                 ASSETS                                          JUNE 30, 1999                DECEMBER 31, 1998
                                                                                 -------------                -----------------
                                                                                  (UNAUDITED)
<S>                                                                                <C>                               <C>
   CURRENT ASSETS:
     Cash and cash equivalents                                                     $    1,382                        $    1,084
     Accounts receivable, less
          allowances of $27,375 and $25,899                                           171,312                           188,100
     Inventories, supplies and prepaid expenses                                        10,526                            10,803
     Income taxes receivable                                                            6,741                             3,321
     Deferred state income taxes                                                        5,386                             4,128
     Debt service trust funds                                                             172                               202
     Due from shareholder -
         Deferred federal income taxes                                                 24,215                            21,294
                                                                                   ----------                        ----------
         Total current assets                                                         219,734                           228,932

   PROPERTY AND EQUIPMENT, NET                                                        688,685                           700,141
   GOODWILL, NET                                                                      140,308                           142,349
   IDENTIFIABLE INTANGIBLE ASSETS, NET                                                  8,977                             9,621
   OTHER ASSETS                                                                        51,930                            54,434
                                                                                   ----------                        ----------
                                                                                   $1,109,634                        $1,135,477
                                                                                   ==========                        ==========
                      LIABILITIES AND SHAREHOLDER'S EQUITY

   CURRENT LIABILITIES:
     Accounts payable, accrued liabilities and due to shareholder                  $  145,020                        $  190,808
     Current maturities of long-term debt                                              20,491                            20,647
                                                                                   ----------                        ----------
         Total current liabilities                                                    165,511                           211,455

   LONG-TERM DEBT                                                                     563,672                           527,101

   OTHER LONG-TERM LIABILITIES                                                          9,141                            13,410

   DUE TO SHAREHOLDER AND AFFILIATES
         Deferred federal income taxes and other                                       59,955                            60,150

   DEFERRED STATE INCOME TAXES                                                         11,103                            10,801

   MINORITY INTERESTS                                                                     859                               931

   SHAREHOLDER'S EQUITY:
    Common stock, $1 par value, 1,000 shares authorized,
         947 shares issued and outstanding                                                  1                                 1
    Additional paid-in capital                                                        208,787                           209,787
    Accumulated other comprehensive (loss) income                                      (3,000)                              187
    Retained earnings                                                                  93,605                           102,654
                                                                                   ----------                        ----------
         Total shareholder's equity                                                   299,393                           311,629
                                                                                   ----------                        ----------
                                                                                   $1,109,634                        $1,135,477
                                                                                   ==========                        ==========
</TABLE>

   The accompanying notes are an integral part of these condensed consolidated
   financial statements.




                                        4
<PAGE>   5







                        EXTENDICARE HEALTH SERVICES, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
                             (Dollars in Thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                         SIX MONTHS                    SIX MONTHS
                                                                            ENDED                         ENDED
                                                                        JUNE 30, 1999                 JUNE 30, 1998
                                                                        -------------                 -------------
<S>                                                                     <C>                            <C>
   OPERATING ACTIVITIES:
   Net (loss) earnings                                                  $ (9,049)                      $  4,208
   Adjustments to reconcile net income to net cash
      provided from operating activities:
      Depreciation and amortization                                       26,527                         28,921
      Provision for uncollectible accounts receivable                      7,163                          4,932
      Gain on sale of assets                                                (609)
      Deferred income taxes                                               (1,947)                        (3,231)
      Minority interests                                                     (21)                           543

   Changes in assets and liabilities:
      Accounts receivable                                                  9,310                         (8,386)
      Inventories, supplies and prepaid expenses                             236                          1,120
      Debt service trust funds                                                30                            190
      Bank indebtedness                                                       --                           (376)
      Accounts payable and accrued liabilities                           (22,542)                        12,296
      Income taxes payable/receivable                                     (3,420)                           257
      Other long-term liabilities                                         (4,269)                         1,911
                                                                        --------                       --------
       Cash provided from operating activities                             1,409                         42,385

   INVESTING ACTIVITIES:
      Payments for acquisitions                                               --                         (5,276)
      Payments for purchase of property and equipment                    (13,658)                       (33,579)
      Proceeds from sale of property and equipment                         4,465                          6,867
      Income taxes paid on sale of pharmacy operations                   (25,000)                            --
      Changes in other non-current assets                                 (3,282)                        (4,884)
                                                                        --------                       --------
       Cash used for investing activities                                (37,475)                       (36,872)

   FINANCING ACTIVITIES:
      Proceeds from issuance of long-term debt                            50,000                         19,100
      Payments of long-term debt                                         (13,585)                       (19,150)
      Distribution of minority interests' earnings                           (51)                          (322)
                                                                        --------                       --------
       Cash provided from (used for) financing activities                 36,364                           (372)
                                                                        --------                       --------
   INCREASE IN CASH AND CASH EQUIVALENTS                                     298                          5,141

   CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                           1,084                          1,418
                                                                        --------                       --------
   CASH AND CASH EQUIVALENTS END OF PERIOD                              $  1,382                       $  6,559
                                                                        ========                       ========
</TABLE>

   The accompanying notes are an integral part of these condensed consolidated
   financial statements.





                                       5
<PAGE>   6






              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

The accompanying financial statements reflect the operations of Extendicare
Health Services, Inc. ("Extendicare" or the "Company"). Extendicare, a Delaware
corporation is a wholly owned subsidiary of Extendicare Inc.

BASIS OF PRESENTATION

The accompanying financial statements include the accounts of the Company and
its majority-owned subsidiaries. All transactions between Extendicare and its
majority-owned subsidiaries have been eliminated.

The financial information presented as of any date other than December 31 has
been prepared from the books and records without audit. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and the
footnotes required by generally accepted accounting principles for complete
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
financial statements, have been included.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1998 contained in the Company's Annual Report on Form 10-K.

RECLASSIFICATIONS

The Corporation has reclassified certain 1998 line items within revenue to
conform to the 1999 presentation. Under the new Prospective Payment System
("PPS"), Medicare ancillary services provided to the Corporation's residents are
now combined with routine care revenue as part of the per diem rate for nursing
residents. As a result, the Corporation has reclassified the prior year medical
specialty revenue provided to affiliated residents to nursing and assisted
living centers revenue. Medical supplies and outpatient therapy revenue includes
revenue to non-affiliated residents and individuals in their own homes, and for
1998 includes revenue from pharmacy services provided to non-affiliated
residents.

















                                       6
<PAGE>   7




2- RECENTLY ISSUED ACCOUNTING STANDARD

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133's effective date was delayed
one year under recently issued SFAS 137. Thus , the effective date for SFAS 133
is for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is not expected to significantly impact the
Company's reporting and disclosures.

3- COMMITMENTS AND CONTINGENCIES

CAPITAL EXPENDITURES

The Company as of June 30, 1999 had capital expenditure purchase commitments
outstanding of approximately $3,764.

LITIGATION

The Company periodically is a defendant in actions brought against it in
connection with its operations. Management believes, on the basis of information
furnished by legal counsel, that none of these actions will have a material
effect on the financial position or results of operations of the Company.


YEAR 2000 UNCERTAINTY

The Year 2000 Uncertainty arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar problems
may arise in some systems which use certain dates in 1999 to represent
something other than a date. The effects of the Year 2000 Uncertainty may be
experienced on, or after January 1, 2000, and, if not addressed, the impact on
operations and financial reporting may range from minor errors to significant
systems failure which could effect an entity's ability to conduct normal
business operations. It is not possible to be certain that all aspects of the
Year 2000 Uncertainty affecting the Company, including those related to the
efforts of customers, suppliers, or other third-parties will be fully resolved.


                                       7
<PAGE>   8





ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS

The Company is one of the largest providers of long-term care and related
services in the United States. The Company operated 201 nursing (21,212
operational beds) and 45 assisted living and retirement facilities (1,901 units)
at June 30, 1999. The Company's facilities are located in 14 states.

The Company's revenues are derived through the provision of healthcare services
in its network of facilities, including long-term care services such as skilled
nursing care, assisted living care and related support services and medical
specialty services such as subacute care and rehabilitative therapy, and medical
equipment, supplies and services. As a result of the Medicare Prospective
Payment System ("PPS"), the Company has reclassified its revenue components.
Nursing and assisted living centers revenue are derived from the provision of
routine and ancillary services for the Company's residents. Medical supplies and
outpatient therapy revenues are derived from providing medical supplies and
outpatient therapy services to non-affiliated residents and individuals in their
own home.

The Company derives its revenue from Medicare, Medicaid and private pay sources.
The following table sets forth the Company's private pay, Medicare and Medicaid
sources of revenue by percentage of total revenue:

<TABLE>
<CAPTION>


                 Three Months Ended June 30       Six Months Ended June 30
                 --------------------------       ------------------------
                    1999             1998            1999         1998
                    ----             ----            ----         ----
<S>                 <C>              <C>              <C>          <C>
   Private Pay      35%              36%              36%          36%
   Medicare         24%              27%              23%          28%
   Medicaid         41%              37%              41%          36%
</TABLE>


Private Pay. The Company classifies payments from individuals who pay directly
for services without governmental assistance as private pay revenue. The
private-pay classification also includes revenues from commercial insurers,
health maintenance organizations ("HMOs"), preferred provider organizations
("PPOs") and other charge-based payment sources as well as revenue from HMO
Medicare risk plans. Blue Cross and Veterans' Administration payments are
included in private pay and are made pursuant to renewable contracts with these
payors.

Medicare. Medicare is a health insurance program funded and administered by the
federal government primarily for individuals entitled to Social Security who are
age 65 or older. Medicare covers the first 20 days of stay in a skilled nursing
facility ("SNF") in full, and the next 80 days above a daily coinsurance amount,
after the individual has qualified by a three-day hospital stay. The Medicare
program consists of two parts: Medicare Part A and Medicare Part B. Medicare
Part A covers inpatient services for hospitals, nursing facilities, and certain
other healthcare providers, and patients requiring daily professional skilled
nursing and other rehabilitative care. Medicare Part B covers services for
suppliers of certain medical items, outpatient services, and doctor's services.

The Balanced Budget Act of 1997 (the "Balanced Budget Act"), signed into law on
August 5, 1997, makes numerous changes to the Medicare and Medicaid programs
which affect the Company. With respect to the Medicare program, the new law
established a Prospective Payment System ("PPS") for SNF services. Under the
PPS, long-term care providers are reimbursed for Medicare Part A services based
on federally established per diem rates for 44 various categories of care
associated with the medical complexities and needs of the patients. The
patient's payment category dictates the amount that the provider will receive to
care for the patient on a daily basis. This new legislation became effective for
cost report periods commencing July 1, 1998 and after. For the Company, this new
system became effective for three facilities during 1998. The remainder of the
Company's facilities became PPS funded as of January 1, 1999. Under certain
criteria, a three-year phase-in to the PPS is effective. This change will reward
efficient providers and penalize those that are inefficient.

Prior to the implementation of the new Medicare PPS the Company was reimbursed
under the Medicare program for its direct costs plus an allocation of indirect
costs up to a regional limit. The costs of care for Medicare patients receiving
specialty medical services often exceeded the regional reimbursement limits. The
Company in such cases filed for routine cost limit ("RCL") exceptions in an
attempt to recover such additional costs. There can be no assurance that the
Company will be able to recover such excess costs under pending or future
exception requests. In addition, on-going efforts by third-party payors to
contain healthcare costs by limiting reimbursement rates, increasing case
management reviews and negotiating reduced contract pricing could affect the
Company's future revenues and profitability.




                                       8
<PAGE>   9


Medicaid. Medicaid is a state-administered program financed by state funds and
matching federal funds. The program provides for medical assistance to the
indigent and certain other eligible persons. Medicaid reimbursement formulas are
established by each state with the approval of the federal government in
accordance with federal guidelines. All of the states in which the Company
operates currently use cost-based reimbursement systems which generally may be
categorized as prospective or retrospective in nature. Under a prospective
system, per diem rates are established based upon the historical cost of
providing services during a prior year, adjusted to reflect factors such as
inflation and any additional services which are required to be performed. Many
of the prospective payment systems under which the Company operates contain an
acuity measurement system which adjusts rates based on the care needs of the
patient. Retrospective systems operate much like the Medicare program. Nursing
facilities are paid on an interim basis for services provided, subject to
adjustments based on allowable costs, which are generally submitted on an annual
basis. Additional payment to a nursing facility by the state or repayment from a
nursing facility to the state can result from the submission of cost reports and
their ultimate settlement. The majority of the states in which the Company
operates nursing facilities use prospective systems.

The Balanced Budget Act repealed the federal payment standard (known as the
Boren Amendment), which required state Medicaid programs to pay rates that were
reasonable and adequate to meet the costs which must be incurred by efficiently
and economically operated nursing facilities. As a result, for Medicaid services
provided on or after October 1, 1997, states have considerable flexibility in
establishing payment rates. The Company is not able to predict whether any
states will adopt changes in their Medicaid reimbursement systems, or, if
adopted and implemented, what effect such initiatives would have on the Company.
Nevertheless, there can be no assurance that such changes in Medicaid
reimbursement to nursing facilities will not have an adverse effect on the
Company. The Balanced Budget Act also allows states to mandate enrollment in
managed care systems without seeking approval from the Secretary of Health and
Human Services for waivers from certain Medicaid requirements as long as certain
standards are met. Although historically these managed care programs have
exempted institutional care, no assurance can be given that these waiver
projects ultimately will not change the reimbursement system for long-term care
facilities from fee-for-service to managed care negotiated or capitated rates or
otherwise affect the levels of payment to the Company.

Funds received by the Company under Medicare and Medicaid are subject to audit
with respect to proper application of various payment formulas. Such audits can
result in retroactive adjustments to revenue. The Company believes that the
payment formulas applicable to it have been properly applied and that any future
adjustments will not have a material impact on its operations.

The following is a summary of significant events in 1999 and 1998.

ACQUISITIONS

During 1998, the Company acquired five nursing facilities (456 operational beds)
and one assisted living facility (88 units) for $19.1 million, including the
assumption of $2.7 million of debt and the assets of four medical specialty
services related businesses for $3.5 million. The Company also added one nursing
facility (76 beds) through an operating lease in 1998.

CONSTRUCTION

The Company completed construction of a nursing facility (120 operational beds),
one nursing facility addition (19 operational beds) and two assisted living
facilities (99 units) during the first six months of 1999.

The Company completed construction of four nursing facilities (384 operational
beds), one nursing facility addition (47 operational beds), five assisted living
facilities (244 units) and two therapy additions during 1998.

DIVESTITURES

The Company sold one nursing facility (248 operational beds) for $4.3 million on
June 30, 1999. The sale resulted in a pretax gain of $0.6 million. The Company
applied the net after-tax proceeds of the sale to reduce $3.1 million of debt in
July 1999.

In 1998, the Company sold its institutional pharmacy business to Omnicare, Inc.
for proceeds of $258.0 million. The sale resulted in a pre-tax gain of $97.8
million and related income tax expense of $72.6 million. Goodwill and other
intangible assets were reduced by $90 million as part of the sale. The Company
applied the after-tax net proceeds of the sale to reduce $165 million of debt.

In connection with the debt reduction, related deferred financing costs of $2.7
million, or $1.7 million after-tax, were written off and classified as an
extraordinary item.



                                       9
<PAGE>   10


The divestiture followed a 1997 management decision that the pharmacy operations
were non-strategic assets. The transaction realized the value of the Company's
pharmacy operations, reduced its debt-to-equity ratio and significantly lowered
interest expense.

RESULTS OF OPERATIONS

The following table sets forth details of revenues and earnings as a percentage
of total revenues:

<TABLE>
<CAPTION>

                                                       THREE MONTHS                 SIX MONTHS
                                                          ENDED                        ENDED
                                                         JUNE 30                      JUNE 30
                                                    ------------------          ------------------
                                                    1999         1998           1999          1998
                                                    ----         ----           ----          ----
<S>                                                 <C>          <C>            <C>           <C>
   Revenues
     Nursing and assisted living                    94.0         84.0           94.2          84.4
     Medical supplies and outpatient therapy         5.2         15.3            5.0          14.9
     Other                                           0.8          0.7            0.8           0.7
                                                   -----        -----          -----         -----
                                                   100.0        100.0          100.0         100.0

   Operating and general and administrative costs   90.0         86.6           90.7          87.1
   Lease costs, depreciation and amortization        7.2          6.0            7.2           6.0
   Interest, net                                     4.9          5.3            4.9           5.2
   Gain on sale of assets and other unusual items   (0.1)          --           (0.1)           --
                                                   -----        -----          -----         -----
   (Loss) earnings before taxes                     (2.0)         2.1           (2.7)          1.7
   (Benefit) Provision for income taxes             (0.7)         1.2           (0.9)          0.9
                                                   -----        -----          -----         -----
   (Loss) earnings before minority interests        (1.3)         0.9           (1.8)          0.8
                                                   -----        -----          -----         -----

   Net (loss) earnings                              (1.3)         0.8           (1.8)          0.7
</TABLE>


THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998

Revenues in the three months ended June 30, 1999 were $249.1 million,
representing a decrease of $42.0 million (14.4%) from $291.1 million in the
three months ended June 30, 1998. The decrease in revenues of $42.0 million
included decreases in nursing and assisted living centers revenues of $10.3
million, medical supplies and outpatient therapy revenues of $31.9 million,
partially offset by an increase in other revenues of $0.2 million.

The decrease in nursing and assisted living centers revenues of $10.3 million
included an increase of $3.3 million from the opening of newly constructed
facilities, the acquisition of one facility effective January 31, 1998, one
facility effective April 1, 1998, and four facilities effective November 1,
1998, partially offset by a facility closure. Revenues from facilities which the
Company operated during each of 1999 and 1998 ("same-facility") decreased $13.6
million when comparing periods. Same-facility revenues decreased between periods
due to the effects of PPS and lower occupancy. Under PPS, the rate received for
Medicare Part A services is lower than what was received under the former
cost-reimbursement system. Same-facility occupancy, defined as patient days for
nursing facilities and units occupied for assisted living facilities, declined
1.0%. Average percentage occupancy for same-facilities, based on beds/units in
operation, was 86.0% in the second quarter of 1999 compared with 86.7% in the
comparable period of 1998.

The decrease in medical supplies and outpatient therapy revenues of $31.9
million (71.1%) included $32.1 million from divestitures during 1998 and 1999
(primarily pharmacy operations of $31.9 million), net of acquisitions. The
remaining increase of $0.2 million is primarily due to growth in outpatient and
contracted services operations.

OPERATING AND GENERAL AND ADMINISTRATIVE COSTS

Operating and general and administrative costs decreased $27.9 million or 11.6%
between periods. The decrease included decreases in costs relating to
divestitures and closed operations, net of acquisitions and newly constructed
facilities, of approximately $19.7 million. The remaining decrease in operating
and general and administrative costs of $8.2 million included decreased costs of
$12.4 million, primarily due to decreased therapy activity as a result of PPS,
partially offset by an increase in wage-related costs of $4.2 million. The
increase in wage-related costs included an increase of $4.3 million to attract
and retain qualified personnel, offset by a decrease in workers' compensation
costs of $0.1 million due to more favorable actuarial adjustments for prior
years in 1999 compared to 1998.




                                       10
<PAGE>   11



LEASE COSTS, DEPRECIATION AND AMORTIZATION

Total lease costs and depreciation and amortization increased $0.4 million when
comparing 1999 to 1998. Lease costs increased $1.4 million due to the new
corporate office facility and upgrade of the computer system, offset by a
decrease in amortization expense of $0.7 million and depreciation expense of
$0.3 million primarily due to the sale of the pharmacy operation and related
goodwill.

INTEREST

Net interest expense decreased $3.3 million to $12.2 million in the three months
ended June 30, 1999 compared with $15.5 million in the comparable period in
1998. The decrease is due to a decrease in the average debt level to $585.9
million during the second quarter of 1999 compared to $721.2 million during the
second quarter of 1998 resulting from the company's use of pharmacy sale
proceeds to paydown debt and due to a decrease in the weighted average interest
rate of all long-term debt to approximately 8.62% during the second quarter of
1999 compared to approximately 8.72% during the second quarter of 1998.

Net interest expense was also affected by more favorable investment earnings in
the second quarter of 1999 compared to the second quarter of 1998.

GAIN ON SALE OF ASSETS AND OTHER UNUSUAL ITEMS

The Company sold a nursing facility on June 30, 1999 for $4.3 million resulting
in a gain on sale of $0.6 million before taxes. In addition, the Company
recorded $0.3 million in severance costs related to certain staff reductions.

START-UP COSTS

The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the second quarter of 1999 of $1.3 million compared to
$1.4 million in the second quarter of 1998.

INCOME TAXES

Income taxes in the three months ended June 30, 1999 decreased to a $1.7 million
tax benefit from a $3.4 million provision for income taxes in the comparable
period in 1998 as a result of decreased earnings.

NET (LOSS) EARNINGS

The net loss in the three months ended June 30, 1999 was $3.3 million, a
decrease of $5.6 million over net earnings of $2.3 million in the comparable
period in 1998.

SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998

Revenues in the six months ended June 30, 1999 were $490.7 million, representing
a decrease of $92.8 million (15.9%) from $583.5 million in the six months ended
June 30, 1998. The decrease in revenues of $92.8 million included decreases in
nursing and assisted living centers revenues of $30.3 million, medical supplies
and outpatient therapy revenues of $63.0 million, partially offset by an
increase in other revenues of $0.5 million.

The decrease in nursing and assisted living centers revenues of $30.3 million
included an increase of $10.0 million from the opening of newly constructed
facilities, the acquisition of one facility effective January 31, 1998, one
facility effective April 1, 1998, and four facilities effective November 1,
1998, partially offset by a facility closure. Revenues from facilities, which
the Company operated during each of 1999 and 1998 ("same-facility"), decreased
$40.3 million when comparing periods. Same-facility revenues decreased between
periods due to the effects of PPS and lower occupancy. Under PPS, the rate
received for Medicare Part A services is lower than what was received under the
former cost-reimbursement system. Same-facility occupancy, defined as patient
days for nursing facilities and units occupied for assisted living facilities,
declined 1.3%. Average percentage occupancy for same-facilities, based on
beds/units in operation, was 86.1% in the first six months of 1999 compared with
87.2% in the comparable period of 1998.

The decrease in medical supplies and outpatient therapy revenues of $63.0
million (72.1%) included $62.1 million from divestitures during 1998 and 1999
(primarily pharmacy operations of $62.0 million), net of acquisitions. The
remaining decrease of $0.9 million is primarily due to the discontinuation of
the contracted services operations.



                                       11
<PAGE>   12



OPERATING AND GENERAL AND ADMINISTRATIVE COSTS

Operating and general and administrative costs decreased $63.6 million or 12.5%
between periods. The decrease included decreases in costs relating to
divestitures and closed operations, net of acquisitions and newly constructed
facilities, of approximately $35.2 million. The remaining decrease in operating
and general and administrative costs of $28.4 million (6.4%) included decreased
costs of $23.4 million, primarily due to decreased therapy activity as a result
of PPS, partially offset by an increase in wage-related costs of $5.0 million.
The increase in wage-related costs included an increase of $5.3 million to
attract and retain qualified personnel, offset by a decrease in workers'
compensation costs of $0.3 million due to more favorable actuarial adjustments
for prior years in 1999 compared to 1998.

LEASE COSTS, DEPRECIATION AND AMORTIZATION

Total lease costs and depreciation and amortization increased $0.4 million when
comparing 1999 to 1998. Lease costs increased $2.4 million due to the new
corporate office facility and upgrade of the computer system, offset by
decreases in amortization expense of $1.6 million and depreciation expense of
$0.4 million primarily due to the sale of the pharmacy operation and related
goodwill.

INTEREST

Net interest expense decreased $5.9 million to $24.2 million in the six months
ended June 30, 1999 compared with $30.1 million in the comparable period in
1998. The decrease was due to a decrease in the average debt level to $586.0
million during the first six months of 1999 compared to $719.3 million during
the first six months of 1998 resulting from the company's use of pharmacy sale
proceeds to paydown debt and due to a decrease in the weighted average interest
rate of all long-term debt to approximately 8.53% during the first six months of
1999 compared to approximately 8.63% during the first six months of 1998.

Net interest expense was also affected by less favorable investment earnings in
the first six months 1999 compared to the first six months of 1998.

GAIN ON SALE OF ASSETS AND OTHER UNUSUAL ITEMS

The Company sold a nursing facility on June 30, 1999 for $4.2 million resulting
in a gain on sale of $0.6 million before income taxes. In addition, the Company
recorded $0.3 million in severance costs related to certain staff reductions.

START-UP COSTS

The Company has absorbed pre-tax start-up losses associated with newly
constructed facilities in the first six months of 1999 of $2.6 million compared
to $3.3 million in the first six months of 1998. The $0.7 million decrease when
comparing periods was due to the timing of facility openings in 1999 versus
1998.

INCOME TAXES

Income taxes in the six months ended June 30, 1999 decreased to a $4.4 million
tax benefit from a $5.3 million provision for income taxes in the comparable
period in 1998 as a result of decreased earnings.

NET (LOSS) EARNINGS

The net loss in the six months ended June 30, 1999 was $9.0 million, a decrease
of $13.2 million over net earnings of $4.2 million in the comparable period in
1998.




                                       12
<PAGE>   13



LIQUIDITY AND CAPITAL RESOURCES

The Company had cash and cash equivalents of $1.4 million at June 30, 1999 and
$1.1 million at December 31, 1998.

Cash flow generated from operations before working capital changes was $22.1
million for the six months ended June 30, 1999 compared with $35.4 in the
comparable period of 1998. The decrease in cash flow from operations before
working capital changes is the result of a decline in operating earnings.

The Company experienced an increase in working capital since December 31, 1998,
excluding cash and borrowings included in current liabilities, of $36.3 million.
The increase in working capital resulted from a decrease in taxes payable of
$36.2 million and a $17.2 million decrease in accounts payable and accrued
liabilities, partially offset by a decrease in accounts receivable of $16.8
million and in inventories, supplies and prepaids of $0.3 million. Taxes payable
included a payment of $25.0 million related to the sale of the pharmacy
operation and a tax benefit of $6.6 million. Accounts receivable at June 30,
1999, were $171.3 million compared with $188.1 million at December 31, 1998,
representing a decrease of $16.8 million. The reduction in accounts receivable
included a decrease within the nursing operations of $12.7 million, a decline
within the Company's medical supplies and outpatient therapy operations of $2.7
million and a decline in prior policy year workers' compensation receivables of
$1.4 million due to collections. Billed patient care and other receivables
decreased $20.8 million while third-party payor settlement receivables increased
$8.1 million within the nursing operations. The decrease in billed patient care
receivables of $20.8 million included a decrease of $3.2 million primarily due
to a decline in Medicare revenues as a result of changes in the Federal
reimbursement policies. The remaining decrease in billed patient care
receivables of $17.6 million was due to the timing of the receipt of remittances
between periods. The increase in settlement receivables of $8.1 million between
periods included $2.3 million due to favorable Medicare rate accrual
adjustments resulting from 1995 cost reimbursement findings, $1.8 million for
anticipated Medicare reimbursement for uncollectible coinsurance amounts, $0.9
million as a result of the appeal of Medicare medical review findings, $2.5
million as a result of Medicare cost report settlements and $0.6 million from
Medicaid rate increases. The decrease in medical supplies and outpatient therapy
receivables of $2.7 million between periods is primarily due to decreased
therapy operations as a result of PPS and the discontinuation of the contracted
services operations.

Property and equipment decreased $11.5 million from December 31, 1998 to a total
of $688.7 million at June 30, 1999. The decrease was the result of depreciation
expense of $22.5 million and asset disposals of $3.5 million offset by, capital
expenditures and asset transfers of $14.5 million. Property and equipment
capital expenditures during 1999 included approximately $4.8 million related to
the construction of new facilities and bed additions to existing facilities. The
Company had under construction at June 30, 1999 one nursing facility, at a total
cost of $7.0 million, of which $6.8 million was incurred prior to June 30, 1999.

Total borrowings, including both current and long-term maturities of debt,
totaled $584.2 million at June 30, 1999 for an increase of $36.4 million from
December 31, 1998. The increase was attributable to increased borrowings on the
Revolving Credit Facility due to the payment of taxes associated with the sale
of the pharmacy operations, deferred compensation payments and as a result of
the growth in property and equipment due to capital expenditures. The weighted
average interest rate of all long-term debt was 8.28% at June 30, 1999 and such
debt had maturities ranging from 1999 to 2015.

During the second quarter of 1999, the Company amended its Senior Credit
Facility. The amendments to the Credit Facility included revisions to the
financial covenants to reflect the financial impact of PPS and included
increased interest rates. Following the amendment, the applicable interest rate
margins in the pricing matrix pertaining to the Company's Revolving Credit
Facility and Tranche A Term Loan range from 0.75% to 2.75% for Eurodollar loans
and 0.50% to 2.00% for base rate loans. The applicable margin for the Tranche B
Term Loan is 3.00% for Eurodollar loans and a range of 1.25% to 2.75% for base
rate loans. As of June 30, 1999, the applicable margin under the Revolving
Credit Facility and Tranche A Term Loan were 2.75% for Eurodollar loans and
2.00% for base rate loans, and the applicable margin under the Tranche B Term
Loan was 3.00% for Eurodolllar loans and 2.75% for base rate loans.

The Company had a $200 million Revolving Credit Facility at June 30, 1999.
Borrowing availability under this line of credit totaled $16.5 million at June
30, 1999 (net of letters of credit in the amount of $35.5 million and a $25
million undrawn availability requirement per the amendment to the Senior Credit
Facility). The undrawn availability requirement is effective until the Company's
Total Leverage Ratio (as defined in the Senior Credit Facility Agreement) does
not exceed 6.0 to 1.0.

The principal source of liquidity for the Company is cash flow from operations
and approximately $16.5 million in additional borrowing availability under the
Revolving Credit Facility. The Company contemplates incurring capital
expenditures (excluding any acquisitions) of approximately $14.0 million during
the last six months of 1999, of which approximately $0.2 million relates to the



                                       13
<PAGE>   14

completion of projects in progress at June 30, 1999. The Company believes that
internally generated cash flow, together with borrowings under the Revolving
Credit Facility, will be sufficient to meet the Company's current operational
cash requirements to fund its capital expenditure program and to meet current
debt obligations.

IMPACT OF THE YEAR 2000 ISSUE

The Year 2000 problem arises from the potential inability of information systems
and other computer-based technology to properly recognize the process
data-sensitive information for dates after December 31, 1999. The Year 2000
issue presents potential problems not only for the Company's computer hardware
and software but also for devices that have embedded technology (including
building infrastructure and medical devices utilized in the Company's
facilities) and issues relating to third parties with which the Company has
material relationship.

The Company derives a substantial portion of its revenues from government
programs. According to a published report on Year 2000 readiness, the Health
Care Financing Administration is confident that all Medicare claims processes
will be ready to function by January 1, 2000.

The Company has confirmed the Year 2000 readiness status for each
intermediary and will take all possible and necessary measures to ensure
appropriate continuing payments for services rendered to all government-insured
patients.

In 1998, the Company initiated a program to identify and resolve its Year 2000
issues. The program followed a standard methodology for Year 2000 compliance and
includes the following phases:

I.       planning and awareness of the Company's Year 2000 program, where
         compliance is defined, the complexity and depth of the Year 2000
         problem is communicated and the business impact of non-compliance is
         identified;
II.      taking inventory to identify all systems, catalog electronic partners
         and interfaces, ascertain those systems that will be affected by the
         Year 2000 date and assess technical risks associated with each system;
III.     completion of a detailed assessment of the compliance of the essential
         systems that will be remediated, which includes business risks, a
         determination to repair, replace, or retire each system, and develop
         detailed plans, schedules and costs for the correction cycle (including
         an assessment of critical suppliers, customers, and other third
         parties); and
IV.      correction of non-compliant systems and equipment - which includes
         resolution, resource allocation, testing and deployment.

The Company has completed its inventory and assessment of its information
technology ("IT") systems and equipment. The inventory of non-IT systems and
equipment (embedded technology) has been completed. The Year 2000 risks
identified were:

I.       any embedded technology within the Company's facilities that could pose
         a threat to overall patient health and safety (including but not
         limited to: telephone, nurse call, elevator or fire control systems;
         and clinical equipment such as ventilators and infusion pumps); and

II.      external systems not within the control of the Company such as those of
         governmental agencies, investment management companies, and other
         financial intermediaries, which could pose a significant risk to the
         cash management and health of the Company.

The Company has:

I.       completed an upgrade of corporate servers to Year 2000 compliant
         systems in the third quarter of 1998;
II.      remediated, tested and deployed the fixed assets, accounts receivable,
         accounts payable, general ledger and budget systems;
III.     made up to four contacts with key vendors regarding their Year 2000
         compliance status;
IV.      acquired the necessary software update for the minimum data set system;
V.       updated or replaced all personal computers at the corporate office;
VI.      assessed compliance of embedded systems within the facilities to ensure
         our patients' continued health and safety; and
VIII.    contacted key suppliers and payers to gain assurance that they will be
         Year 2000 compliant. Most key suppliers and payers who have responded
         to inquiries have indicated that they expect to be Year 2000 compliant
         in a timely fashion. As a contingency, the Company maintains a broad
         base of vendors. The Company does not believe it is at risk with
         respect to any individual vendor or supplier who may be non-compliant.

Activities have also included the selection and testing of a new payroll system
and the installation of approximately 1,000 new personal



                                       14
<PAGE>   15

computer workstations in the facilities. While these activities will resolve
Year 2000 problems related to these systems, they have been planned for some
time and are not considered to be directly related to Year 2000 readiness.

The Company is planning to be Year 2000 compliant for all its essential systems
and equipment by October 31, 1999, although there can be no assurance that it
will achieve its objective by such date or by January 1, 2000.

The Company currently estimates that its aggregate costs directly related to
Year 2000 compliance efforts will be approximately $600,000 for corporate
applications and approximately $1,400,000 for all of the Company's facilities,
of which approximately $850,000 has been spent through June 30, 1999. The
Company's Year 2000 efforts are ongoing and its overall plan and cost
estimations will continue to evolve, as new information becomes available. All
costs, except long-lived assets, are expensed as incurred.

The ultimate impact of the Year 2000 issue depends not only on the Company's
actions to mitigate problems, but also on how the issue is addressed by third
parties with which the Company has a material relationship. Risks for the
Company could include the inability to receive reimbursement from government
agencies (directly or through intermediaries). In addition, uncertainties exist
as to the Company's ability to detect all Year 2000 problems and to resolve all
identified issues in a timely manner. The Company is unable to quantify the
potential effect on its operations, liquidity and financial position should any
of these events occur. While the Company expects to resolve all Year 2000 risks
without a material adverse impact on its results of operations and financial
position, there can be no assurance as to its ultimate success.

The Company's has developed contingency plans for the Company's Year
2000-related issues, which include, but are not limited to, identification of
alternate suppliers, technologies and manual systems.

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and other information provided by the
Company from time to time, contains certain "forward-looking" statements as that
term is defined by the Private Securities Litigation Reform Act of 1995. All
statements regarding the Company's expected future financial position, results
of operations, cash flows, continued performance improvements, ability to
service its debt obligations, finance growth opportunities, respond to changes
in government regulations, and similar statements including, without limitation,
those containing words such as "believes," "anticipates," "expects," "intends,"
"estimates," "plans," and other similar expressions are forward-looking
statements. Forward-looking statements involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
differ materially from those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors: national
and local economic conditions, the effect of government regulation and changes
in regulations governing the healthcare industry, including the Company's
compliance with such regulations; changes in Medicare and Medicaid payment
levels; liabilities and other claims asserted against the Company; the ability
to attract and retain qualified personnel; the availability and terms of capital
to fund acquisitions; the competitive environment in which the Company operates;
demographic changes; the ability to timely locate and correct all relevant
computer codes prior the year 2000; and the availability and cost of labor and
materials. Given these risks and uncertainties, the Company can give no
assurances that these forward-looking statements will, in fact, transpire and,
therefore, cautions investors not to place undue reliance on them.




                                       15
<PAGE>   16



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

QUALITATIVE DISCLOSURES

OBJECTIVES AND CONTEXT

The Company uses variable-rate debt to finance its operations. In particular, a
portion of the Company's long-term debt obligation is based upon floating LIBOR
rates. These debt obligations expose the Company to variability in interest
payments due to changes in interest rates. If interest rates increase, interest
expense increases. Conversely, if interest rates decrease, interest expense also
decreases.

Management believes that in the current interest rate environment that it is
prudent to limit the variability of a portion of its interest payments. It is
the Company's objective to hedge between 50 to 80 percent of its interest rate
exposure.

Furthermore, the Company also holds stock and stock warrants obtained in
connection with a recent sale of the Company's pharmacy operations. In effect,
these holdings can be considered a contingent purchase price whose value, if
any, may not be realized for several years. These stock and warrant holdings are
subject to various trading and exercise limitations and will be held until such
time that management feels the market opportunity is appropriate to trade or
exercise such holdings.

STRATEGIES

To meet these objectives, management enters into various types of derivative
instruments to manage fluctuations in cash flows resulting from interest rate
risk. These instruments consist of interest rate swaps. The interest rate swaps
change the variable rate cash-flow exposure on the short-term and long-term
interest payments to fixed-rate cash flows by entering into receive-variable,
pay-fixed interest rate swaps. Under the interest rate swaps, the Company
receives variable interest rate payments and makes fixed interest rate payments,
thereby creating fixed-rate long-term debt.

With respect to the stock and warrant holdings, management monitors the market
to adequately determine the appropriate market timing to act in order to
maximize the value of these instruments. With the exception of the above
holdings, the Company does not enter into derivative instruments for any purpose
other than cash flow hedging purposes. That is, the Company does not speculate
using derivative instruments.

RISK MANAGEMENT POLICIES

The Company assesses interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.













                                       16
<PAGE>   17


QUANTITATIVE DISCLOSURES

The Company is a party to several interest rate swap agreements to reduce the
impact of changes in interest rates on certain of its floating rate long-term
debt. The first agreement, entered into in 1995, effectively changes the
Company's interest rate exposure on $32 million of floating rate Industrial
Development Bonds due in 2014 to a fixed rate of 4.155% through October, 2000.
During 1998, the Company entered into five agreements (each $50 million of
principal) with three banks which effectively changes the interest rates on
LIBOR based borrowings to fixed rates ranging from 5.53% to 5.84% plus
applicable margins, for periods over three to seven years. The differential
between the fixed rates and the variable rate interest to be paid or received
will be accrued as interest rates change and recognized over the life of the
agreement. The Company may be exposed to credit loss in the event of
non-performance by the banks under the swap agreements but does not anticipate
such non-performance. In May 1999, the Company closed two of the agreements
(each $50 million in notional value), thereby reducing the range of the fixed
rates to between 5.53% and 5.78% and the overall hedging period from seven to
five years. These agreements were disposed of at no cost and an immaterial gain
to the Company.

Interest expense for the three months ended June 30, 1999 includes $0.3 million
of net expense, resulting in year-to-date expense of $0.8 million. The component
of interest expense relating to the hedges' ineffectiveness was not deemed
material.

Since the Company has not adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, changes in the fair value of interest rate
swaps designed to hedge the variability of cash flows associated with the
floating-rate, long-term debt obligations are not reported in accumulated other
comprehensive income (AOCI). In addition, the Financial Accounting Standards
Board has voted to delay the effective date of this Statement to all fiscal
quarters of fiscal years beginning after June 15, 2001, thus delaying the
planned adoption of this Statement by the Company by an additional year. If this
statement were adopted as of June 30, 1999, AOCI would reflect a gain of $634
based upon quoted market prices provided by the financial institutions which are
counterparts to the swaps. Changes in the fair values of the stock and warrant
holdings are reported in AOCI net of related deferred tax accruals required
under SFAS 115 "Accounting for Certain Investments in Debt and Equity
Securities." The amount reflected in AOCI for 1999 related to stock and warrant
holdings equals $3,187. The estimated net amount of the gains or losses that are
expected to be reclassified into earnings within the next 12 months is uncertain
due to the uncertainty of stock market conditions and the interest rate
environment. As mentioned previously, the Company has closed two of its swap
agreements in the three months ended June 30, 1999 at no cost and an immaterial
gain to the Company. Management will continue to monitor the interest rate
exposure and adjust hedging levels to reflect outstanding debt levels.

As of June 30, 1999, the maximum length of time over which the Company is
hedging its exposure to the variability in future cash flows associated with
variable-rate, long-term debt is five years.





                                       17
<PAGE>   18


The table below presents principal (or notional) amounts and related weighted
average interest rates by year of maturity for the Company's debt obligations
and interest rate swaps.

<TABLE>
<CAPTION>

                                                                                                                      FAIR
                                          1999      2000     2001      2002     2003       THEREAFTER     TOTAL       VALUE
                                        --------  -------- --------  -------- --------     -----------  ---------    --------
<S>                                      <C>       <C>      <C>      <C>       <C>          <C>         <C>           <C>
            Long-term Debt
              Fixed Rate..............   1,842     4.685    1,750       648         632      209,543     219,100       244,238
              Average Interest Rate...    9.22%     9.22%    9.22%     9.22%       9.22%        9.29%       9.22%
              Variable Rate...........   9,220    18,195   20,979    23,762      23,776      269,131     365,063       351,602
              Average Interest Rate...    7.43%     7.42%    7.40%     7.38%       7.35%        7.35%       7.39%
            Interest Rate Swaps
              Variable to Fixed.......      --    32,000       --    50,000     100,000                  182,000           634
              Average Pay Rate........    5.55%     5.68%    5.68%     5.65%       5.65%          --        5.55%
              Average Receive Rate....    4.81%     5.00%    5.00%     5.00%       5.00%          --        4.81%
</TABLE>

The above table incorporates only those exposures that exist as of June 30, 1999
and does not consider those exposures or positions which could arise after that
date or future interest rate movements. As a result, the information presented
above has limited predictive value. The Company's ultimate results with respect
to interest rate fluctuations will depend upon the exposures that arise during
the period, the Company's hedging strategies at the time and interest rate
movements.



                                       18
<PAGE>   19




PART II

                                OTHER INFORMATION

ITEM 1.  Legal Proceedings

    There are no material pending legal proceedings other than litigation
    arising in the ordinary course of business. Management believes, on the
    basis of information furnished by legal counsel, that none of these actions
    will have a material effect on the financial position results of operations
    of the Company.

ITEM 2.  Change in Securities

    None

ITEM 3.  Defaults Upon Senior Securities

    None

ITEM 4.  Submission of Matters to a Vote of Security Holders

    None

ITEM 5.  Other Information

    None

ITEM 6.  Exhibits and Reports on Form 8-K

(a)      List of Exhibits:

  11.0   Computation of earnings per share for the three months and six months
         ended June 30, 1999
  27.0   Financial Data Schedule

(b) Reports on Form 8-K

    There were no reports on Form 8-K filed during the three months ended June
    30, 1999.











                                       19


<PAGE>   20


                        EXTENDICARE HEALTH SERVICES, INC.

                                  EXHIBIT INDEX

Exhibit No.                         Description


  11.0   Computation of earnings per share for the three months and six months
         ended June 30, 1999

  27.0   Financial Data Schedule

                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

EXTENDICARE HEALTH SERVICES, INC.

Date:  August 13, 1999                 By: /s/ Stephen F. Dineley
                                       Stephen F. Dineley
                                       Vice President, Chief Financial Officer,
                                       Treasurer and Director (principal
                                       financial officer and principal
                                       accounting officer)





                                       20